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I Saw the Crisis Coming. Why Didn’t the Fed?

82 points by jakarta 17y ago

Estragon 17y ago
I saw it coming too. (But I only put my money in a shorting mutual fund. Didn't have the great vision, this guy did. Still, I avoided the losses most experienced.) If I could see it, anyone could have. I'm not particularly smart or well-connected.
portman 17y ago
If this article piqued your interest, please PLEASE read The Big Short by Michael Lewis, in which he tells the entire, fascinating story of Michael Burry, the one-eyed genius with Asburger's who fought against the entire Wall Street establishment. http://www.amazon.com/dp/0393072231 http://www.amazon.com/dp/0393072231
- archgoon 17y ago
  Previously featured on ycombinator, with a link to an excerpt about Michael Burry from The Big Short. http://news.ycombinator.com/item?id=1160552 http://news.ycombinator.com/item?id=1160552
muerdeme 17y ago
"Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it. As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word." Instead of expecting Greenspan to see exactly what Burry saw, wouldn't it be better if we didn't have a single point of failure? In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong.
- cma 17y ago
  Will a Bursting Bubble Trouble Bernanke?: The Evidence for a Housing Bubble November 2005, Dean Baker and David Rosnick http://www.cepr.net/index.php/publications/reports/will-a-bursting-bubble-trouble-bernanke-the-evidence-for-a-housing-bubble/ http://www.cepr.net/index.php/publications/reports/will-a-bu... (Baker has papers going back to Oct 2003 on it)
- natrius 17y ago
  "In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong." Can you explain this point further? How did Burry's investments not raise the prices of credit default swaps? What does Wall Street rely on the Fed for that led to that result?
  - joelhaus 17y ago
    This is precisely what needs addressing. CDS are over the counter trades without a central clearinghouse. Therefore little data is available and the counter parties create terms blindly. This is what they mean when talking about transparency.
deleted 17y ago
[deleted]
startuprules 17y ago
Audit the fed: http://www.auditthefed.com/ http://www.auditthefed.com/ Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American
- jrockway 17y ago
  The banks paid TARP back, with interest. That means the taxpayers made money.
  - _delirium 17y ago
    Only if you exclude the AIG bailout (much of which went directly to the banks as counterparties) from the figures...
- bd_at_rivenhill 17y ago
  Audit the Congress: the AIG bailout was about $180 billion of which about half has already been paid back by the company selling off pieces of itself and the rest might be paid back within 5 years. AIG is cleaning itself up, all of the investment banks have repaid their bailout money, and so have most of the large banks. The estimated cost of the Fannie/Freddie "conservatorship" is $291 billion as of late 2009 and another $389 billion over the next 10 years, almost as much as the war in Iraq up to this point. Guess what, these "companies" are not being unwound, but are actually increasing the size of their mortgage books because cheap housing is still a policy goal.
TorKlingberg 17y ago
The problem is, there are always a lot of people seeing a crash coming. The difficult part is telling if they are right or just being crackpots.
- startuprules 17y ago
  1.) 'Crackpots' labeling is an easy way for corporate mass media to label the truth tellers to discourage you from researching further (If you look at 2005-2007 CNBC interviews, they called alot of these people 'crackpots') 2.) Most of the time these 'truth tellers' are way early in their calls. It's up you to look at the numbers/charts and figure out when the said phenomenom should occur.
  - gloob 17y ago
    1) 'Crackpot' labeling is also an easy way to label the crackpots, to discourage you from wasting your life either believing nonsense or trying to argue against it. It is not worth my time to do independent research on the question of whether the Americans actually landed on the moon. 2) You know what they say about broken clocks and being right. Someone who is always predicting a collapse will successfully predict any collapse.
    - lotharbot 17y ago
      Many of the people predicting this collapse were "new players" to the market, not people always predicting collapses. Take the guy who runs seattlebubble.com. He's an ordinary guy who wanted to buy a house, realized prices were really high compared to his expectations, and started digging deeper. He hadn't predicted any past collapses of anything, he just realized that housing costs were unsustainably high and called it. Many of the other bubble-predictors were in the same boat. The guys always predicting collapses are crackpots. The normal people who called this bubble because they realized house prices had jumped without corresponding changes in income or demographics, but only changes in bank lending standards, were not crackpots.
  - TorKlingberg 17y ago
hasanove 17y ago
Check out "Peter Schiff was right" video: http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw Now, talk about "nobody could have predicted this" (c) Obama
- mistermann 17y ago
  Yes, Peter Schiff was probably the most prolific person on warning about the impending crisis. However, despite how smart he is, when the crisis finally came, his portfolios (precious metals,short US$) got hit very hard, for a short period of time.
tomkinstinch 17y ago
Related: http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true http://www.vanityfair.com/business/features/2010/04/wall-str...
grandalf 17y ago
The only time Greenspan could have meaningfully intervened was back in 2002 or earlier, and even then intervention would have caused enough pain to have the media deem it a "crisis" in itself. Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war -- nobody wanted the economy cooled at all when gas prices were already creeping up. So what's the man to do now? He could admit all that about the war and cast serious doubt on the Fed's independence and the US financial system, or he could insist that the boom/bust was a complete and total mystery. In his last book he goes to great pains to marvel at seemingly impossible "risk adjusted rates of return" throughout a variety of markets, but concludes that in the case of housing it's still "froth" and not a bubble. Since the bubble hadn't become obvious at the time of the book's publication, what else would he say? But more practically, we should all realize that if housing prices had dipped about 1-2% less than they did, most of the damage would not have occurred. Our institutions (banks, etc.) were calibrated to handle some amount of systemic risk, but not as much as it turned out they should have. Hindsight is 20/20 and Burry may have been extra prescient, but like any bettor he could have been wrong. Since he had no additional information than the rest of the market, we can conclude that the rest were all sheep (or idiots) or that there was actually some -- gasp -- chance going on. The difference is that the majority of people, institutions, etc., misjudged just how much calamity would be caused by price deviations that they calculated to be highly improbable.
- anamax 17y ago
  > Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his teeth kicked in over this one. Interestingly enough, Fannie and Freddie execs during that time were largely Dems, most of whom who landed in the Obama administration. While at Fannie and Freddie, they took out millions. Oh, and during this time, Fannie and Freddie were lying about the mortages in their portfolios, which threw off everyone's risk evaluation. (Their portfolios contained far more subprime than they admitted to.) If Fannie and Freddie weren't politically connected GSEs, folks would be in jail.
  - 17y ago
gjm11 17y ago
There's an old saying: Academic economists have successfully predicted nine of the last five major recessions. That is: One possible answer to the question in the title is: "Because actually the available information didn't make it clear what would happen and when; you thought it did, but actually you just got lucky." Whether that's actually the case here is of course difficult to tell. On the one hand, hindsight bias (http://en.wikipedia.org/wiki/Hindsight_bias http://en.wikipedia.org/wiki/Hindsight_bias) makes it likely that it won't feel like it is, even if it is. On the other hand, uh, it does indeed feel like the crisis was pretty predictable. (But I bet that most people who are now saying "well, that was hardly surprising" failed, just as FWIW I failed, to short the market heavily or anything. Not-being-surprised is cheap.)
- gahahaha 17y ago
  The correct quote is by the late great Paul A. Samuelson and he said:"The stock market has forecast nine of the last five recessions" The rest of your comment is right on the mark.
- VBprogrammer 17y ago
  I have to agree with the idea that he just got lucky. If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?
  - jakarta 17y ago
    He came up with the credit default swap trade where you buy insurance against mortgage backed securities failing. This was really a great trade because his losses were capped at around 5% a year while his upside was huge, imagine a 6:1 payout.
  - anamax 17y ago
    > If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities? "The market can stay irrational longer than you can stay solvent." is the traditional response. The problem was "obvious" in 2001.
alanthonyc 17y ago
"Everybody missed it. Academia, the Federal Reserve, all regulators." - Alan Greenspan That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic. When a bank official told me that "jobless, bankrupt, illegal immigrant, it doesn't matter," they can get somone a home loan, I should have known what that meant, and so should the Fed. Greenspan should just shut up and accept his legacy.
- jakarta 17y ago
  Just to note - It was Burry that came up with the idea for using credit default swaps (CDSs) to short the subprime mortgage market. That idea eventually found its way to Paulson, who was able to use it on a larger scale.
- lotharbot 17y ago
  There were a lot of us watching the signs in 2005 or so. There were a lot of us who didn't miss it. And it wasn't "crackpot conspiracy theory" types; it was normal people looking to buy a home and wondering why median prices in our area climbed from 3x to 5x median income within a few years, when the 3x figure had been pretty steady since WWII. A little bit of research showed that a lot of houses had been bought on unusual terms -- no-doc loans, very little down, adjustable rates, and so on. For those of us who expect to buy a home with 20% down, a 15-30 year mortgage, and payments less than 38% of take-home income, it seemed very strange that banks were lending people money on considerably looser terms. Easy money leading to a sharp climb in prices, combined with a big increase in speculators/flippers, should have been a tipoff that we were looking at a bubble market. There's no excuse for "experts" like Greenspan to have missed it, when the everyday people running websites like seattlebubble.com saw it coming.
  - hristov 17y ago
    You are absolutely right. If you look at most housing forums on the internet, for example most people looking to buy housing were absolutely certain there was a bubble going on. They just knew that (i) ordinary people in their neighbourhood could not afford the houses in their neighbourhood and (ii) there were no rich people coming in buying those houses either so something had to give.
WalterBright 17y ago
A couple years back, I remember reading an article that argued that housing was way overpriced because the rents were only about half the value of the house. They should be in line with each other.
- BearOfNH 17y ago
  Long about 2005-6 one of my investment newsletters urged those who could to "sell your house and rent", on the theory the median home price could not indefinitely remain out of reach of the median home buyer. A bit early, but still correct. I'm not sure the final chapter has been written, even as the DOW bumps up near 11,000.
djcjr 17y ago
What do you mean they didn't see it coming? The Fed engineers this stuff.
T_S_ 17y ago
There will always be a distribution of opinions and therefore people with "foresight". The real challenge is to design a system with more stability. My opinion is that while we have had many putative capitalists in charge of regulating markets, we have very little understanding of what it takes for markets to function well. One thing missing from the debate is an interest in reducing informational asymmetries. If I have two bags of apples one paper and one see-through plastic, you are going to buy the plastic bag (environmental issues aside). Our financial markets don't work very well, because financial accounting is the opaque paper bag.
deleted 17y ago
[deleted]
jakarta 17y ago
For anyone interested in learning more about Michael Burry, I wrote a post using material from an old message board he used to run: http://streetcapitalist.com/2010/03/24/learning-from-michael-burry/ http://streetcapitalist.com/2010/03/24/learning-from-michael... It is pretty amazing to see how far he has come since then, from a young doctor posting about investing on the internet to going head to head with Greenspan.
Confusion 17y ago
The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same people. If someone truly had better insight, you would expect them to make the right predictions more often. However, if history teaches anything, it is that I can safely predict that Burry will never again make such an accurate prediction and that it will never be clear whether he was a prophet or a lucky bastard.
- jakarta 17y ago
  I think that Burry is simply arguing that the methods he and other shorts used to call this crisis (which Taleb refers to as a gray swan -- since so many called it) should be more closely examined, rather than being simply dismissed as statistical aberrations. Maybe investors/wall street can learn a useful thing or two from them. To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap. The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.
  - ugh 17y ago
    This could be total confirmation bias but I myself was somewhat amazed that everyone seemed to have been so surprised by the crisis. I don’t care all that much about what’s happening in the US (not being from there and all) but I have been clicking through the current New York Times cartoons for the past few years or so. In retrospect it looked to me as though there were constantly crumbling houses in those cartoons (I was always confused by them, it was only later that it made ‘click’), years and months before the bubble burst. If even the cartoonists knew it …
  - mistermann 17y ago
manderson2080 17y ago
The relationship between Wall Street and Washington blurred the lines too much. As a regulator, its tough to recognize a fundamental flaw in the investing practices of the firms that these people used to work for. The "good old boy" network was reluctant to admit that they all screwed up.
stretchwithme 17y ago
The Fed DID see what was happening. They saw M3 soaring. So they did the logical thing. They discontinued publishing the M3 statistic in 2006. Yep, they decided we just need to bury our heads in the sand and the developing crisis would just go away. But did it? http://www.shadowstats.com/alternate_data/money-supply-charts http://www.shadowstats.com/alternate_data/money-supply-chart...
- mcantor 17y ago
  Dear God.
hristov 17y ago
Most people could have predicted it and many people did. This includes not only people like Mike Burry, George Soros and others that made money out of the whole mess, but also those bastards in Goldman Sachs who after touting and selling housing debt derivatives for the entire bubble ended up being short on housing just when the bubble burst. Multiple people in academia predicted the crash. Nouriel Roubini (spelling is wrong) Peter Schif, every economist that ever posted on Counterpunch, etc. And also of course most ordinary people predicted it. If you look at the housing forums on the Internet from about 3 to 4 years ago you will see that most people were sure there would be a crash and only people that were already deeply invested in real estate were trying to think of ever more creative ways to deny it. So Greenspan's statements speak more about him than the actual reality. He and the Bush government just surrounded themselves with economists from one very narrow school of thought and did not listen to anyone else. It is not that people did not predict the recession, it is that Greenspan would not listen to anyone who predicted it, therefore nobody that he bothered to listen to predicted it.
sliverstorm 17y ago
Give it 10 years, and when the LHC spawns a dimensional rift connecting us to Xen, I guarantee at least one man will come forward and say, "I can't believe nobody else saw it coming". He will be treated like a prophet, when in reality he was just a lucky alarmist. Either that, or he will be me- a lucky satirist.
anonjon 17y ago
It is a fucking conspiracy. fed is run by the banks, banks didn't want fed to intervene bc they were making big bonuses and it was good for the people there. duh. This is an obvious case of corruption of our government. No one was regulating because they didn't want to regulate it. This is why there needs to be things like campaign finance reform and people should seriously go to jail without chance of being pardoned for these types of crimes. Willful ignorance of this shit should have been considered aiding & abetting theft. But no, no one will go to jail because the rich and powerful never go to jail. They didn't get rich and powerful by not being corrupt.
- anonjon 17y ago
  go fuck yourself guy who down-voted me, you are part of the willful ignorance. Greenspan was a goddamned Rayndian. Stephen Friedman had super strong ties to goldman sachs, In fact, almost everyone high up in the fed has ties to banking in one form or another. None of the people involved are even interested fair in regulation. I don't understand why this is controversial. it is a fucking conspiracy and I'm calling it as it is. Would my post have been better if I had suggested execution, or is the real reason it is downvoted because it is unpopular to call something a conspiracy? we all tell ourselves these fairy tales about how the world is fair and there are no conspiracies and closed door deals between those in power, but it is all a lie.
  - mcantor 17y ago
    Dude. What in the history of Hacker News would make you possibly believe that a post starting with "It's a fucking conspiracy" in earnest would do anything except get brutally downvoted?
- rms 17y ago
  Yes, there is always some conspiracy, but calling it a conspiracy is not nearly enough to actually explain the situation and your gut reaction is lowering the quality of conversation. Also the threat of jail is not enough to fix the problem.
yason 17y ago
Well, you don't see what you wouldn't want to see even if it's right in front of your face. And that works collectively in a society as well. No matter how many people are yelling "soon, we're toast!", you won't hear it if you don't want to imagine such an outcome in the first place. Boom.
rfreytag 17y ago
I think this is actually an argument for more accessible markets. Retail investing was not offering vehicles to the average investor who wanted to invest believing that house prices would fall. I wondered to many professional and non-professional investors how t invest against the housing market to no avail. If people had understood how to "bet" against house prices then I am confident the bubble would have deflated more gently and earlier. The easiest retail position to take is a "long" purchase of an investment instrument. What is needed is the knowledge of and retail accessibility to bubble-deflating investments. How far should this go? Anyone should be able to own and even construct derivatives. Such a market would bring along a host of educational material and means to understand the provenance of your derivatives and the counter-party risk. Obviously this accessibility and transparency would benefit professional derivative investors as the pool of clients, information, transparency, and alternative parties and views with which to trade expands. But this is impossible as long as the notion of "qualified investor" exists. If Greenspan and traditional economics has any hope of being correct then what is needed is to enlarge the pool of "qualified investors" to simply everyone. We need not more regulation but less but for the requirement that the prospectus be accurate, intelligible, and anyone that sells "investments" must do business with anyone has the purchase price. Taleb says market-based black swans are becoming more common. The question is: are they common enough to make a profitable business out of suppressing them?
- grandalf 17y ago
  A very insightful comment. I like to say that if Greenspan had replaced his famous "irrational exuberance" comment with one citing "incredible short selling opportunities for insightful investors" things would have turned out much better.
balding_n_tired 17y ago
It was pretty obvious, I think. And I will remark that the NY Times at least once wrote up the people doing interest-only mortgages as bold financial innovators.
RyanMcGreal 17y ago
I started seriously worrying about the crash back in 2004 [1], and while I was wrong about a lot of details (not least, ahem, the result of the 2004 US presidential election), I was bang-on about the underlying problem. What eventually surprised me was just how long the bubble was able to continue inflating before it finally popped. [1] http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html

82 points by jakarta 17y ago

I saw it coming too. (But I only put my money in a shorting mutual fund. Didn't have the great vision, this guy did. Still, I avoided the losses most experienced.) If I could see it, anyone could have. I'm not particularly smart or well-connected.

portman 17y ago

If this article piqued your interest, please PLEASE read The Big Short by Michael Lewis, in which he tells the entire, fascinating story of Michael Burry, the one-eyed genius with Asburger's who fought against the entire Wall Street establishment. http://www.amazon.com/dp/0393072231 http://www.amazon.com/dp/0393072231

archgoon 17y ago
Previously featured on ycombinator, with a link to an excerpt about Michael Burry from The Big Short. http://news.ycombinator.com/item?id=1160552 http://news.ycombinator.com/item?id=1160552

muerdeme 17y ago

"Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it. As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word." Instead of expecting Greenspan to see exactly what Burry saw, wouldn't it be better if we didn't have a single point of failure? In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong.

cma 17y ago
Will a Bursting Bubble Trouble Bernanke?: The Evidence for a Housing Bubble November 2005, Dean Baker and David Rosnick http://www.cepr.net/index.php/publications/reports/will-a-bursting-bubble-trouble-bernanke-the-evidence-for-a-housing-bubble/ http://www.cepr.net/index.php/publications/reports/will-a-bu... (Baker has papers going back to Oct 2003 on it)
natrius 17y ago
"In the absence of Wall Street's reliance on the Fed, Burry's insurance plays could have further pushed up prices and signaled to everyone else that something was wrong." Can you explain this point further? How did Burry's investments not raise the prices of credit default swaps? What does Wall Street rely on the Fed for that led to that result?
- joelhaus 17y ago
  This is precisely what needs addressing. CDS are over the counter trades without a central clearinghouse. Therefore little data is available and the counter parties create terms blindly. This is what they mean when talking about transparency.

deleted 17y ago

[deleted]

startuprules 17y ago

Audit the fed: http://www.auditthefed.com/ http://www.auditthefed.com/ Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American

jrockway 17y ago
The banks paid TARP back, with interest. That means the taxpayers made money.
- _delirium 17y ago
  Only if you exclude the AIG bailout (much of which went directly to the banks as counterparties) from the figures...
bd_at_rivenhill 17y ago
Audit the Congress: the AIG bailout was about $180 billion of which about half has already been paid back by the company selling off pieces of itself and the rest might be paid back within 5 years. AIG is cleaning itself up, all of the investment banks have repaid their bailout money, and so have most of the large banks. The estimated cost of the Fannie/Freddie "conservatorship" is $291 billion as of late 2009 and another $389 billion over the next 10 years, almost as much as the war in Iraq up to this point. Guess what, these "companies" are not being unwound, but are actually increasing the size of their mortgage books because cheap housing is still a policy goal.

TorKlingberg 17y ago

The problem is, there are always a lot of people seeing a crash coming. The difficult part is telling if they are right or just being crackpots.

startuprules 17y ago
1.) 'Crackpots' labeling is an easy way for corporate mass media to label the truth tellers to discourage you from researching further (If you look at 2005-2007 CNBC interviews, they called alot of these people 'crackpots') 2.) Most of the time these 'truth tellers' are way early in their calls. It's up you to look at the numbers/charts and figure out when the said phenomenom should occur.
- gloob 17y ago
  1) 'Crackpot' labeling is also an easy way to label the crackpots, to discourage you from wasting your life either believing nonsense or trying to argue against it. It is not worth my time to do independent research on the question of whether the Americans actually landed on the moon. 2) You know what they say about broken clocks and being right. Someone who is always predicting a collapse will successfully predict any collapse.
  - lotharbot 17y ago
    Many of the people predicting this collapse were "new players" to the market, not people always predicting collapses. Take the guy who runs seattlebubble.com. He's an ordinary guy who wanted to buy a house, realized prices were really high compared to his expectations, and started digging deeper. He hadn't predicted any past collapses of anything, he just realized that housing costs were unsustainably high and called it. Many of the other bubble-predictors were in the same boat. The guys always predicting collapses are crackpots. The normal people who called this bubble because they realized house prices had jumped without corresponding changes in income or demographics, but only changes in bank lending standards, were not crackpots.
- TorKlingberg 17y ago

hasanove 17y ago

Check out "Peter Schiff was right" video: http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw Now, talk about "nobody could have predicted this" (c) Obama

mistermann 17y ago
Yes, Peter Schiff was probably the most prolific person on warning about the impending crisis. However, despite how smart he is, when the crisis finally came, his portfolios (precious metals,short US$) got hit very hard, for a short period of time.

tomkinstinch 17y ago

Related: http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true http://www.vanityfair.com/business/features/2010/04/wall-str...

grandalf 17y ago

The only time Greenspan could have meaningfully intervened was back in 2002 or earlier, and even then intervention would have caused enough pain to have the media deem it a "crisis" in itself. Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war -- nobody wanted the economy cooled at all when gas prices were already creeping up. So what's the man to do now? He could admit all that about the war and cast serious doubt on the Fed's independence and the US financial system, or he could insist that the boom/bust was a complete and total mystery. In his last book he goes to great pains to marvel at seemingly impossible "risk adjusted rates of return" throughout a variety of markets, but concludes that in the case of housing it's still "froth" and not a bubble. Since the bubble hadn't become obvious at the time of the book's publication, what else would he say? But more practically, we should all realize that if housing prices had dipped about 1-2% less than they did, most of the damage would not have occurred. Our institutions (banks, etc.) were calibrated to handle some amount of systemic risk, but not as much as it turned out they should have. Hindsight is 20/20 and Burry may have been extra prescient, but like any bettor he could have been wrong. Since he had no additional information than the rest of the market, we can conclude that the rest were all sheep (or idiots) or that there was actually some -- gasp -- chance going on. The difference is that the majority of people, institutions, etc., misjudged just how much calamity would be caused by price deviations that they calculated to be highly improbable.

anamax 17y ago
> Notably he did speak up about Fannie and Freddie in the early 2000s but was silenced by the GOP's drive to make war Wrong. Fannie and Freddie were protected by Dems, not Repubs. Mccain got his teeth kicked in over this one. Interestingly enough, Fannie and Freddie execs during that time were largely Dems, most of whom who landed in the Obama administration. While at Fannie and Freddie, they took out millions. Oh, and during this time, Fannie and Freddie were lying about the mortages in their portfolios, which threw off everyone's risk evaluation. (Their portfolios contained far more subprime than they admitted to.) If Fannie and Freddie weren't politically connected GSEs, folks would be in jail.
- 17y ago

gjm11 17y ago

There's an old saying: Academic economists have successfully predicted nine of the last five major recessions. That is: One possible answer to the question in the title is: "Because actually the available information didn't make it clear what would happen and when; you thought it did, but actually you just got lucky." Whether that's actually the case here is of course difficult to tell. On the one hand, hindsight bias (http://en.wikipedia.org/wiki/Hindsight_bias http://en.wikipedia.org/wiki/Hindsight_bias) makes it likely that it won't feel like it is, even if it is. On the other hand, uh, it does indeed feel like the crisis was pretty predictable. (But I bet that most people who are now saying "well, that was hardly surprising" failed, just as FWIW I failed, to short the market heavily or anything. Not-being-surprised is cheap.)

gahahaha 17y ago
The correct quote is by the late great Paul A. Samuelson and he said:"The stock market has forecast nine of the last five recessions" The rest of your comment is right on the mark.
VBprogrammer 17y ago
I have to agree with the idea that he just got lucky. If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities?
- jakarta 17y ago
  He came up with the credit default swap trade where you buy insurance against mortgage backed securities failing. This was really a great trade because his losses were capped at around 5% a year while his upside was huge, imagine a 6:1 payout.
- anamax 17y ago
  > If he was really so sure of his assessment back then then why didn't he short sell a bucket load of these mortgage backed securities? "The market can stay irrational longer than you can stay solvent." is the traditional response. The problem was "obvious" in 2001.

alanthonyc 17y ago

"Everybody missed it. Academia, the Federal Reserve, all regulators." - Alan Greenspan That is complete bullshit. Try telling that to Paulson, who made billions on the crash. I saw the signs myself, but did not understand them, not believing that people like Greenspan would allow something so stupid to take place. When studies show that Americans trust their government less than ever, mark me down as a statistic. When a bank official told me that "jobless, bankrupt, illegal immigrant, it doesn't matter," they can get somone a home loan, I should have known what that meant, and so should the Fed. Greenspan should just shut up and accept his legacy.

jakarta 17y ago
Just to note - It was Burry that came up with the idea for using credit default swaps (CDSs) to short the subprime mortgage market. That idea eventually found its way to Paulson, who was able to use it on a larger scale.
lotharbot 17y ago
There were a lot of us watching the signs in 2005 or so. There were a lot of us who didn't miss it. And it wasn't "crackpot conspiracy theory" types; it was normal people looking to buy a home and wondering why median prices in our area climbed from 3x to 5x median income within a few years, when the 3x figure had been pretty steady since WWII. A little bit of research showed that a lot of houses had been bought on unusual terms -- no-doc loans, very little down, adjustable rates, and so on. For those of us who expect to buy a home with 20% down, a 15-30 year mortgage, and payments less than 38% of take-home income, it seemed very strange that banks were lending people money on considerably looser terms. Easy money leading to a sharp climb in prices, combined with a big increase in speculators/flippers, should have been a tipoff that we were looking at a bubble market. There's no excuse for "experts" like Greenspan to have missed it, when the everyday people running websites like seattlebubble.com saw it coming.
- hristov 17y ago
  You are absolutely right. If you look at most housing forums on the internet, for example most people looking to buy housing were absolutely certain there was a bubble going on. They just knew that (i) ordinary people in their neighbourhood could not afford the houses in their neighbourhood and (ii) there were no rich people coming in buying those houses either so something had to give.

WalterBright 17y ago

A couple years back, I remember reading an article that argued that housing was way overpriced because the rents were only about half the value of the house. They should be in line with each other.

BearOfNH 17y ago
Long about 2005-6 one of my investment newsletters urged those who could to "sell your house and rent", on the theory the median home price could not indefinitely remain out of reach of the median home buyer. A bit early, but still correct. I'm not sure the final chapter has been written, even as the DOW bumps up near 11,000.

djcjr 17y ago

What do you mean they didn't see it coming? The Fed engineers this stuff.

T_S_ 17y ago

There will always be a distribution of opinions and therefore people with "foresight". The real challenge is to design a system with more stability. My opinion is that while we have had many putative capitalists in charge of regulating markets, we have very little understanding of what it takes for markets to function well. One thing missing from the debate is an interest in reducing informational asymmetries. If I have two bags of apples one paper and one see-through plastic, you are going to buy the plastic bag (environmental issues aside). Our financial markets don't work very well, because financial accounting is the opaque paper bag.

deleted 17y ago

[deleted]

jakarta 17y ago

For anyone interested in learning more about Michael Burry, I wrote a post using material from an old message board he used to run: http://streetcapitalist.com/2010/03/24/learning-from-michael-burry/ http://streetcapitalist.com/2010/03/24/learning-from-michael... It is pretty amazing to see how far he has come since then, from a young doctor posting about investing on the internet to going head to head with Greenspan.

Confusion 17y ago

The problem is: Greenspan may very well be right in his assessment that Burry may just have been 'a supremely lucky flipper of coins'. There are thousands of people in similar positions making predictions about all kinds of phenomena. Whatever the outcome, there are always a number of predictions that are 'uncannily' close to that outcome. Unfortunately, these 'correct' predictions are only seldomly made by the same people. If someone truly had better insight, you would expect them to make the right predictions more often. However, if history teaches anything, it is that I can safely predict that Burry will never again make such an accurate prediction and that it will never be clear whether he was a prophet or a lucky bastard.

jakarta 17y ago
I think that Burry is simply arguing that the methods he and other shorts used to call this crisis (which Taleb refers to as a gray swan -- since so many called it) should be more closely examined, rather than being simply dismissed as statistical aberrations. Maybe investors/wall street can learn a useful thing or two from them. To me, spotting bubbles is not so difficult. There are a few great investors who have excellent track records when it comes to dodging bubbles/crises. They may not profit immensely, but their downside is usually protected and they are cash rich to pick up securities on the cheap. The real difficulty comes from figuring out when a bubble will burst -- which is really anyone's guess. Burry himself ran into trouble on this end which created friction and eventually lawsuits with his investors.
- ugh 17y ago
  This could be total confirmation bias but I myself was somewhat amazed that everyone seemed to have been so surprised by the crisis. I don’t care all that much about what’s happening in the US (not being from there and all) but I have been clicking through the current New York Times cartoons for the past few years or so. In retrospect it looked to me as though there were constantly crumbling houses in those cartoons (I was always confused by them, it was only later that it made ‘click’), years and months before the bubble burst. If even the cartoonists knew it …
- mistermann 17y ago

manderson2080 17y ago

The relationship between Wall Street and Washington blurred the lines too much. As a regulator, its tough to recognize a fundamental flaw in the investing practices of the firms that these people used to work for. The "good old boy" network was reluctant to admit that they all screwed up.

stretchwithme 17y ago

The Fed DID see what was happening. They saw M3 soaring. So they did the logical thing. They discontinued publishing the M3 statistic in 2006. Yep, they decided we just need to bury our heads in the sand and the developing crisis would just go away. But did it? http://www.shadowstats.com/alternate_data/money-supply-charts http://www.shadowstats.com/alternate_data/money-supply-chart...

mcantor 17y ago
Dear God.

hristov 17y ago

Most people could have predicted it and many people did. This includes not only people like Mike Burry, George Soros and others that made money out of the whole mess, but also those bastards in Goldman Sachs who after touting and selling housing debt derivatives for the entire bubble ended up being short on housing just when the bubble burst. Multiple people in academia predicted the crash. Nouriel Roubini (spelling is wrong) Peter Schif, every economist that ever posted on Counterpunch, etc. And also of course most ordinary people predicted it. If you look at the housing forums on the Internet from about 3 to 4 years ago you will see that most people were sure there would be a crash and only people that were already deeply invested in real estate were trying to think of ever more creative ways to deny it. So Greenspan's statements speak more about him than the actual reality. He and the Bush government just surrounded themselves with economists from one very narrow school of thought and did not listen to anyone else. It is not that people did not predict the recession, it is that Greenspan would not listen to anyone who predicted it, therefore nobody that he bothered to listen to predicted it.

sliverstorm 17y ago

Give it 10 years, and when the LHC spawns a dimensional rift connecting us to Xen, I guarantee at least one man will come forward and say, "I can't believe nobody else saw it coming". He will be treated like a prophet, when in reality he was just a lucky alarmist. Either that, or he will be me- a lucky satirist.

anonjon 17y ago

It is a fucking conspiracy. fed is run by the banks, banks didn't want fed to intervene bc they were making big bonuses and it was good for the people there. duh. This is an obvious case of corruption of our government. No one was regulating because they didn't want to regulate it. This is why there needs to be things like campaign finance reform and people should seriously go to jail without chance of being pardoned for these types of crimes. Willful ignorance of this shit should have been considered aiding & abetting theft. But no, no one will go to jail because the rich and powerful never go to jail. They didn't get rich and powerful by not being corrupt.

anonjon 17y ago
go fuck yourself guy who down-voted me, you are part of the willful ignorance. Greenspan was a goddamned Rayndian. Stephen Friedman had super strong ties to goldman sachs, In fact, almost everyone high up in the fed has ties to banking in one form or another. None of the people involved are even interested fair in regulation. I don't understand why this is controversial. it is a fucking conspiracy and I'm calling it as it is. Would my post have been better if I had suggested execution, or is the real reason it is downvoted because it is unpopular to call something a conspiracy? we all tell ourselves these fairy tales about how the world is fair and there are no conspiracies and closed door deals between those in power, but it is all a lie.
- mcantor 17y ago
  Dude. What in the history of Hacker News would make you possibly believe that a post starting with "It's a fucking conspiracy" in earnest would do anything except get brutally downvoted?
rms 17y ago
Yes, there is always some conspiracy, but calling it a conspiracy is not nearly enough to actually explain the situation and your gut reaction is lowering the quality of conversation. Also the threat of jail is not enough to fix the problem.

yason 17y ago

Well, you don't see what you wouldn't want to see even if it's right in front of your face. And that works collectively in a society as well. No matter how many people are yelling "soon, we're toast!", you won't hear it if you don't want to imagine such an outcome in the first place. Boom.

rfreytag 17y ago

I think this is actually an argument for more accessible markets. Retail investing was not offering vehicles to the average investor who wanted to invest believing that house prices would fall. I wondered to many professional and non-professional investors how t invest against the housing market to no avail. If people had understood how to "bet" against house prices then I am confident the bubble would have deflated more gently and earlier. The easiest retail position to take is a "long" purchase of an investment instrument. What is needed is the knowledge of and retail accessibility to bubble-deflating investments. How far should this go? Anyone should be able to own and even construct derivatives. Such a market would bring along a host of educational material and means to understand the provenance of your derivatives and the counter-party risk. Obviously this accessibility and transparency would benefit professional derivative investors as the pool of clients, information, transparency, and alternative parties and views with which to trade expands. But this is impossible as long as the notion of "qualified investor" exists. If Greenspan and traditional economics has any hope of being correct then what is needed is to enlarge the pool of "qualified investors" to simply everyone. We need not more regulation but less but for the requirement that the prospectus be accurate, intelligible, and anyone that sells "investments" must do business with anyone has the purchase price. Taleb says market-based black swans are becoming more common. The question is: are they common enough to make a profitable business out of suppressing them?

grandalf 17y ago
A very insightful comment. I like to say that if Greenspan had replaced his famous "irrational exuberance" comment with one citing "incredible short selling opportunities for insightful investors" things would have turned out much better.

balding_n_tired 17y ago

It was pretty obvious, I think. And I will remark that the NY Times at least once wrote up the people doing interest-only mortgages as bold financial innovators.

RyanMcGreal 17y ago

I started seriously worrying about the crash back in 2004 [1], and while I was wrong about a lot of details (not least, ahem, the result of the 2004 US presidential election), I was bang-on about the underlying problem. What eventually surprised me was just how long the bubble was able to continue inflating before it finally popped. [1] http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html http://www3.sympatico.ca/taylormcgreal/thecomingcrash.html